Uintah Basin Medical Center v. Hardy

2002 UT 92, 54 P.3d 1165, 455 Utah Adv. Rep. 36, 19 I.E.R. Cas. (BNA) 9, 2002 Utah LEXIS 120, 2002 WL 1997978

• Court: Utah Supreme Court
• Decided: August 30, 2002
• Docket: 20000501
• Status: Published

Opinions

INTRODUCTION

DURRANT, Associate Chief Justice:

{1 This appeal concerns the voidability of certain government contracts. Specifically, we consider the question of when a contract entered into by a predecessor governing body is voidable by a successor governing body. Throughout the country, substantial case law has developed to distinguish between those government contracts that may be voided and those that may not be voided by a successor governing body. Various common law tests have been articulated, all designed to balance the tension between the right of a successor governing body to implement its own policies and not be bound by those of a former body, and the interest in providing some certainty to parties who contract with governing bodies. Utah courts have relied on the governmental/proprietary test, a test under which contracts involving proprietary functions and having reasonable durations are enforceable against successor governing bodies. -

T2 In this case, the district court granted summary judgment to a county hospital on the theory that the particular contract at issue, a contract for the provision of pathological services to the hospital by a doctor, was voidable by the hospital's governing body-its board of trustees. The district court held that the contract had been entered into by a predecessor board and thus was voidable by successor boards.

T3 Because we conclude that the contract for pathological services involves a proprietary function, we remand with instructions that the district court determine whether the contract's duration was reasonable.

BACKGROUND

T 4 The following facts are undisputed. On November 29, 1994, Dr. Leo Hardy entered into a contract with Uintah Basin Medical Center ("UBMC"), a hospital owned by Du- . chesne County and operated by a board of trustees. Under the terms of the contract, Dr. Hardy received $400 per month for providing UBMC pathological services on a part-time basis and serving as the director of its pathology laboratory. The contract did not recite a termination date, but provided that either party could terminate the contract for "just cause" following ninety days' notice.

T5 Although Dr. Hardy performed his contractual obligations satisfactorily and received no complaints from UBMC or its medical staff, on July 18, 1996, the UBMC board of trustees voted to give Dr. Hardy ninety days' notice and invite another doctor to join its medical staff as a pathologist and emer-geney room physician. When Dr. Hardy's termination became effective, UBMC sought a declaratory judgment that it had "just cause" to terminate the contract. Dr. Hardy counterelaimed, contending that UBMC materially breached the contract by terminating him because UBMC did not have "just cause." The district court initially denied the parties' respective motions for summary judgment, ruling that the jury would decide whether UBMC had "just cause".

T 6 Following this ruling, the district court accepted supplemental briefing from the parties on an issue UBMC had raised for the first time in its answer to Dr. Hardy's counterclaim: whether the contract violated common law rules against government contracts that bind successor governing bodies. After hearing from the parties, the court granted UBMC summary judgment on the ground that the contract was voidable even without " 'just cause' simply because it could not bind successor Boards." In reaching this conclusion, the district court explained, "Due to the rapid advance of science, medicine [sic] changes and needs of patients there should be no reason for such an agreement to continue into the future or be binding on successor where the governing [bloard is a governmental entity." Dr. Hardy appeals. Section 78-2-2(8)(j) of the Utah Code gives us appellate jurisdiction over this case. Utah Code Ann. § 78-2-2(8)(j) (Supp.2001).

ANALYSIS

I. STANDARD OF REVIEW

17 "In deciding whether the trial court correctly granted [summary] judgment as a matter of law, 'we give no deference to the trial court's view of the law; we review it for correctness" " SME Indus., Inc v. Thompson, Ventulett, Stainback & Assocs., 2001 UT 54, ¶ 9, 28 P.3d 669 (quoting Ron Case Roofing & Asphalt Paving, Inc. v. Blomquist, 773 P.2d 1382, 1385 (Utah 1989)).

II. RATIONALE BEHIND COMMON LAW RESTRICTIONS ON GOVERNMENT CONTRACTS THAT BIND SUCCESSOR GOVERNING BODIES

[ 8 Before addressing Dr. Hardy's specific claims on appeal, we briefly discuss the rationale behind the common law rules regarding contracts that bind successor governing bodies.

19 Government contracts raise public policy concerns beyond those involved with private contracts. See, e.g., Mitchell v. Chester Hous. Auth., 389 Pa. 314, 132 A.2d 873, 876 (1957). One such concern involves contracts that extend beyond the term of the governing body that originally entered into the contract. Such contracts, if enforced, potentially allow a former governing body to perpetuate its policies beyond its term and thereby limit a successor governing body's ability to respond to the public's changing needs. See generally Figuly v. City of Douglas, 853 F.Supp. 381, 384 (D.Wyo.1994).

10 While such concerns militate against enforcing a predecessor governing body's contracts against its successors, the common law also recognizes a countervailing concern: that permitting successor governing bodies to indiscriminately terminate government contracts may make private parties hesitant to contract with government entities, thereby reducing the viability of contracts as a means of solving public problems. See Plant Food Co. v. City of Charlotte, 214 N.C. 518, 199 S.E. 712, 714 (1938).

111 A desire to accommodate these competing concerns animates the various common law tests for determining whether a contract should be enforced against a sucees-sor governing body. The test on which Utah courts rely is known as the governmental/proprietary test. See Bair v. Layton City Corp., 6 Utah 2d 138, 147-48, 307 P.2d 895, 902 (1957); see also Salt Lake City v. State, 22 Utah 2d 37, 42, 448 P.2d 350, 354 (1968) (holding that contract for providing water to state capitol grounds was enforceable under the governmental/proprietary test)¹ Under the governmental/proprietary test, a contract is (1) unenforceable against successor governing bodies if it involves a governmental power or function, but (2) enforceable against successor governing bodies if it involves a proprietary power or function and is of a reasonable duration. Bair, 6 Utah 2d at 147-48, 307 P.2d at 902.

{12 Having set forth the governmental/proprietary test, we next apply it to Dr. Hardy's contract to determine whether the contract may be validly enforced against sue-cessor hospital boards of trustees.

III WHETHER DR HARDVS CONTRACT IS ENFORCEABLE AGAINST SUCCESSOR BOARDS OF TRUSTEES

113 Dr. Hardy maintains the district court erred in concluding that his contract was voidable because it bound successor boards.² Relying on the governmental/proprietary test, Dr. Hardy argues that his contract for pathological services involves a proprietary function and therefore was enforceable against successor boards provided it is of a reasonable duration. We agree.

A. Dr. Hardy's Contract Was Proprietary in Nature

14 The factors on which courts have relied to distinguish between governmental and proprietary contracts strongly support the conclusion that Dr. Hardy's contract for pathological services involves a proprietary function. First, UBMC has not demonstrated that the services Dr. Hardy provides under the contract are "indispensable to the proper functioning of government." County Council v. SHL Systemhouse Corp., 60 F.Supp.2d 456, 465 (E.D.Pa.1999). To the contrary, consistent with the view that Dr. Hardy's contract did not involve functions essential to governance, Duchesne County conveyed the hospital to a non-profit organization on July 3, 2000.

{15 Moreover, under the terms of the contract, Dr. Hardy merely recommended, but did not have authority to set, policies related to UBMC's pathology laboratory. The board's retention of this policymaking discretion weighs heavily in favor of deeming the contract proprietary. See Rhode Island Student Loan Auth. v. NELS, Inc., 550 A.2d 624, 627 (R.I.1988) (concluding contract was proprietary because contracting party "could neither exercise discretion nor set policy in performance of its duties").

116 Accordingly, we conclude that Dr. Hardy's contract involves a proprietary function.

B. Whether Dr. Hardy's Contract Was of Reasonable Duration Depends on the Scope of the Contract's "Just Cause" Provision

117 Under the governmental/proprietary test, Dr. Hardy's proprietary contract is enforceable if its duration was reasonable at the time the parties executed the contract. Bair, 6 Utah 2d at 148, 307 P.2d at 902. Whether a contract's duration is "reasonable" depends on the cireumstances of each case. See, eg., id., 6 Utah 2d at 143, 148, 307 P.2d at 899, 903 (holding that a fifty-year sewage treatment contract was valid because its lengthy duration allowed city to obtain treatment facilities without undue delay and expense, and also facilitated long-term planning). Depending on the circumstances, a lengthy or indefinite contractual duration is not necessarily unreasonable. See id.; see also Salt Lake City, 22 Utah 2d at 42, 448 P.2d at 354 (validating contract that required city to provide free water to land as long as the land served as the state capitol grounds, noting that city derives continuing economic benefit from capitol's presence).

118 As the record has been inadequately developed on the issue of the reasonableness of the contract's duration, we remand to permit the district court to allow further development of the record and to then make this determination. On remand, as a preliminary matter, the district court should interpret the intended scope of the contract's "just cause" provision,³ since the reasonableness of the contract's duration depends in large part on the amount of discretion this provision gives to successor boards. For example, if the "just cause" provision gives successor boards broad discretion to terminate Dr. Hardy (e.g., to improve patient care, for fiscal considerations), the contract is more likely to be of a reasonable duration than if the "just cause" provision permitted termination only for deficient job performance. In evaluating whether the duration is reasonable, the district court may also find it useful to compare Dr. Hardy's contract to the agreements UBMC typically enters into with medical professionals. For example, UBMC's bylaws concerning its medical staff suggest that UBMC routinely enters into agreements under which the only practical durational limit is a liberally-construed "just cause" provi-sion⁴ The extent to which the durational limitations in Dr. Hardy's contract conform to UBMC's usual practices in similar situations may factor into the district court's reasonableness assessment.

T19 If the district court determines that the contract's duration is reasonable, the contract is enforceable. The court should then determine whether the UBMC board had "just cause" to terminate Dr. Hardy. On the other hand, if the district court determines that the contract's duration is unreasonable, the court should not enforce the contract.

120 The dissent maintains that a term should be implied into Dr. Hardy's contract. In support of its argument, the dissent relies on canons of construction that have been.developed to aid courts in discerning the parties' intent when a contract fails to specify a duration. We reject the dissent's position for several reasons. First, and most importantly, neither party has argued in their briefs in favor of implying a term. To the contrary, both parties maintain that the contract should be evaluated as an indefinite-length contract whose duration is limited only by the "just cause" provision⁵ In ef-feet, then, the parties have implicitly stipulated that the contract has an indefinite term.⁶ Implying a term would therefore result in a contract that is contrary to the intent of either party and violate the preeminent goal of contractual interpretation (Le., to give effect to the intent of the parties). Buehner Block Co. v. UWC Assocs., 752 P.2d 892, 895 (Utah 1988). Accordingly, because the parties agree that the contract should be treated as an indefinite-length contract, there is no need to rely on canons of construction for resolving ambiguities over whether the parties intended the contract be of indefinite duration.⁷

T21 Second, conspicuously absent from the dissent's analysis is any citation to Utah precedent that supports its position. Contrary to the dissent's position, when a contract for employment or personal services does not recite a fixed term, the law in Utah does not call for the judicial reformation of the contract to impose a term, especially where, as here, neither party disputes the contract was of indefinite duration. Indeed, in a case in which we traced the historical development of the law associated with employment contracts, we specifically noted that courts long ago repudiated a common law rule under which a term was implied when an employment contract did not specify a duration. Berube v. Fashion Centre, Ltd., 771 P.2d 1033, 1040-41 (Utah 1989)⁸ In its place, courts in Utah and elsewhere adopted the at-will employment rule, under which employment contracts that did not specify a duration were generally presumed to be terminable at will. Id. at 1041. In time, Utah recognized an exception under which an employee could rebut the at-will presumption associated with indefinite-length contracts by showing the parties intended the contract be terminable for cause. Johnson, 818 P.2d at 1000-01 & n. 9; see also Brehany v. Norstrom, Inc., 812 P.2d 49, 54 (Utah 1991). Significantly, nothing in Johnson, Brehany, or Berube suggests that a court should sua sponte impose a term on an indefinite-length employment contract that provides for termination for cause.

¶ 22 Applying Utah precedent to Dr. Hardy's contract confirms our view that a term should not be read into the contract. First, because Dr. Hardy's contract does not specify a duration, under Utah law we initially presume it is of indefinite duration but terminable at will. Berube, 771 P.2d at 1040-41. We do not apply the long-since rejected rule that previously required the implication of a term. Id. Second, we consider whether any of the exceptions to the at-will rule applies. In this regard, we note that the parties expressly provided the contract was terminable for "just cause." We further note that the parties agree in their appellate briefs that the contract is of indefinite length and terminable only for "just cause." Accordingly, we conclude that the at-will presumption has been rebutted and Dr. Hardy's indefinite length contract is terminable for "just cause." Johnson, 818 P.2d at 1000-01 & n. 9; see also Brehany, 812 P.2d at 54.⁹

¶ 23 Finally, we disagree with the dissent's contention that the imposition of a term is justified as a means of easing the calculation of prospective damages.¹⁰ The dissent itself concedes that parties can contract for an indefinite term. In making this concession, the dissent implicitly acknowledges that, to give effect to the parties' intent, courts inevitably and routinely need to determine damages associated with a breach of an indefinite employment contract. In making such determinations, courts have relied on various factors in addressing the kinds of concerns raised by the dissent:

While a district court has considerable experience in calculating future earnings, some basis must appear in the record for such an award. Some of the factors which district courts have employed to alleviate the speculative nature of future damage awards include an employee's duty to mitigate, "the availability of employment opportunities, the period within which one by reasonable efforts may be re-employed, the employee's work and life expectancy, the discount tables to determine the present value of future damages and other factors that are pertinent on prospective damage awards."

Shore v. Fed. Express Corp., TT7i F.2d 1155, 1160 (6th Cir.1985) (quoting Koyen v. Con-sol. Edison Co., 560 F.Supp. 1161, 1168-69 (S.D.N.Y¥.1983)). "It is not difficult to determine the ... factors that are pertinent on prospective damage awards." Koyen, 560 F.Supp. at 1168-69. Regardless, while the determination of damages presents challenges, so would the determination of a "reasonable" duration, especially when both parties on appeal appear resistant to the imposition of a term.

CONCLUSION

¶ 24 We conclude that Dr. Hardy's contract for pathological services is a proprietary contract, and thus is enforceable against successor UBMC boards of trustees if it is of a reasonable duration. Accordingly, we remand to the district court to permit it to determine whether the contract's duration is reasonable.

1 25 Remanded.

[26 Chief Justice DURHAM and Judge BENCH concur in Justice DURRANT's opinion.

1 . Citing various criticisms of the governmental/proprietary test, both parties urge us to repudiate it in favor of other common law tests. However, because the parties have failed to show that any of their suggested tests is clearly better than the governmental/proprietary test, we decline to repudiate it at this time. See State v. Menzies, 889 P.2d 393, 398 (Utah 1994) (noting that because of stare decisis, "[those asking us to overturn prior precedent have a substantial burden of persuasion").

2 . Dr. Hardy also argues that the rationale behind the common law rules does not apply (1) to appointed, staggered boards like the UBMC board of trustees, or (2) until a majority of the nine voting members of the board are replaced. These arguments are without merit. First, the rationale behind the common law rules applies to appointed, staggered governing bodies because preexisting contracts may also unduly inhibit these bodies in the performance of their public duties. See Mitchell, 132 A.2d at 877-78; Piedmont Pub. Serv. Dist. v. Cowart, 319 S.C. 124, 459 S.E.2d 876, 882 (App.1995). Second, there is inadequate support in the law for the contention that a majority turnover in the UBMC board is required before the board can challenge the contract. See Mariano & Assocs., P.C. v. Bd. of County Comm'rs, 737 P.2d 323, 331 (Wyo.1987) (concluding that precedent did not support argument that turnover in board was required before it could challenge validity of contract).

In addition, Dr. Hardy argues that the successor UBMC board was precluded from terminating his contract because the board earlier ratified it. Since this issue was not raised below, we decline to address it. See Monson v. Carver, 928 P.2d 1017, 1022 (Utah 1996).

3 . See Miller v. USAA Cas. Ins. Co., 2002 UT 6, ¶ 64, 44 P.3d 663 (noting that determination of scope of contractual "clause is a question of law for determination by the district court because it is a matter of contract interpretation").

4 . Under UBMC's bylaws, although appointments to the medical staff are ostensibly limited to two years, staff members are reappointed unless there is "just cause." Under the bylaws, "just cause"" appears to have a broad scope: for instance, the board may terminate a member of the medical staff for any reason "reasonably related to the delivery of quality patient care."

5 . Dr. Hardy asserts the following in his appellate brief:

To entice excellent physicians to move to and remain in rural areas, hospitals often add perks to the contracts, including "just cause" termination provisions, or even "lifetime" contracts.... Given the necessities of the situation, such contracts are of reasonable duration. Thus, [Dr. Hardy's contract] passes the second part of the Bair test....

Appellant's Br. at 21.

Despite disagreeing with Dr. Hardy on the ultimate conclusion of whether an indefinite-length contract with a "just cause" provision is of reasonable duration, UBMC clearly agrees that the contract was of indefinite duration:

The potentially perpetual duration of Dr. Hardy's contract with UBMC was limited only by the "just cause" provision.... [Dr. Hardy's] contract bound Duchesne County indefinitely....

Appellee's Br. at 28-29.

6 . The dissent acknowledges that parties may enter into an indefinite-length contract.

7 . The dissent acknowledges that "both parties contend that the contract should be evaluated as an indefinite-length contract limited only by just cause," yet nonetheless argues for the imposition of a fixed duration. The dissent has cited no cases, nor are we aware of any, in which we rejected parties' mutual concessions that are in harmony and clearly expressed. Given that the goal in interpreting contracts is to give effect to the intent of the parties, we should be particularly reluctant to reject the parties' stipulations or concessions in this case.

The clear import of the parties' concessions is that the parties intended the contract to be of indefinite duration. The imposition of a fixed duration is therefore incompatible with the parties' concessions. Moreover, the law in Utah and numerous other jurisdictions recognizes the right of parties to enter into indefinite length contracts terminable for cause. Johnson v. Morton Thiokol, Inc., 818 P.2d 997, 1000-01 & n. 9 (Utah 1991); e.g., Shah v. Am. Synthetic Rubber Corp., 655 S.W.2d 489, 491-92 (Ky.1983). In short, the imposition of a term would contradict the parties' stated intent, disregard their legal arguments, and impede their freedom to contract. This we decline to do.

Significantly, the dissent also acknowledges that the parties have not argued in their appellate briefs that a term should be implied into the contract. In the absence of adequate briefing, it would be ill-advised for the court to raise this issue sua sponte, especially if the dissent is correct in asserting that this issue presents a question of first impression. Prince v. Bear River Mut. Ins. Co., 2002 UT 68, ¶ 59, - P.3d , 2002 WL 1610562 ("On myriad occasions, we have held that we will not address issues inadequately briefed.").

8 . Although Berube was a plurality opinion, a majority of the court concurred in the portion of the opinion that traced the historical development of the common law of employment contracts.

9 . The cases cited by the dissent are (1) from other jurisdictions and therefore not binding and (2) are either distinguishable from, or inapposite to, the present case. In reaching its conclusion, the dissent relies heavily on cases not involving employment contracts. This reliance is tenuous given the fact that courts have developed a unique set of rules for employment and personal service contracts. See generally Berube, 771 P.2d at 1040-41; Consol. Theatres, Inc. v. Theatrical Stage Employees Union, Local 16, 69 Cal.2d 713, 73 CalRptr. 213, 447 P.2d 325, 335 & n. 12 (1968) (noting that due to special policy considerations associated with employment contracts, such contracts are exempt from rule applicable to other contracts under which courts imply a term when a contract is silent as to duration).

For example, the dissent cites Mid-Southern Toyota, Ltd. v. Bug's Imports, Inc., 453 S.W.2d 544, 549 (Ky.1970) in support of its position. That case did not involve an employment contract, however, and, moreover, when faced with an employment contract, the relevant jurisdiction (Kentucky) relies on rules of interpretation specifically tailored to employment contracts. Skah v. Am. Synthetic Rubber Corp., 655 SW.2d 489, 491-92 (Ky.1983) (confirming parties' right to enter into contracts under which person is employed for an indefinite period of time and may be terminated only for cause). Accordingly, the more pertinent case from the cited jurisdiction is consistent with the view that when an employment contract is silent as to duration, courts generally do not imply a fixed term of years. See id. Instead, as in Johnson, Kentucky courts presume such a contract is terminable at will unless the parties clearly express another criterion for termination (e.g., for cause). Id.

The cases cited by the dissent that involve employment contracts provide little support for its conclusion that a term must be imposed on Dr. Hardy's contract. For example, when faced with an indefinite-length employment contract, the court in Paisley v. Lucas did not impose a term but rather applied rules of construction specific to employment contracts. 346 Mo. 827, 143 S.W.2d 262, 271 (1940).

10 . The dissent asks the following:

[If hospital breached the contract], how would Dr. Hardy's damages be calculated? Would Dr. Hardy be entitled to all of his loss of earnings under the indefinite contract? [WJould he be entitled to compensation ... to the date of his death? To the date of his retirement? To the date of his inability to perform his job responsibilities ... ?